Posted
by
ScuttleMonkeyon Friday November 13, 2009 @04:55PM
from the what-corporate-veil dept.

ZipK writes "With their former boss cooling his heels on a 150-year sentence, programmers Jerome O'Hara and George Perez are now in the US Attorney's crosshairs. They've been arrested and charged with criminal conspiracy, and 'accused of producing false documents and trading records at Bernard L. Madoff Investment Securities LLC in New York.' Apparently Madoff's fraud was too large and too complex to be foisted entirely by hand."

There are so many great opportunities out there for making a legitimate living programming that it makes me wonder why these guys volunteered to spend the best years of their lives stealing from people.

Something like this, they'd have to be paid a lot better than what they could make legitimately.

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?" (more )

Since when was it a crime to have a former CEO in charge of the US Treasury, who has an obvious financial interest in the firm's survival?
Since when was it a crime to be the exclusive market maker in CDS, after your two major competitors go out of business, giving you a completely risk-free profit on bit-ask spreads?
Since when was it a crime to upgrade a company whose stock offering you are underwriting?

Unless the programmers were committing fraud by asking people for investment money with no intention to return it, how are they breaking the law? I'm unaware that Madoff was hacking people's computers, creating viruses, or even downloading copyrighted movies.

If you're a programmer hired to write a financial or accounting program, and never given information as to how that program is going to be actually used - how are you breaking the law? Hell if this logic applies, go after Microsoft too because I'm sure that Madoff used Microsoft Word to send mail to some of his clients.

OK perhaps there's some detail we don't know, and will find out at trial - perhaps some programmers were in on the fact that it was a scam. However this reeks to me of overzealous prosecutors trying to spread as much blame around as possible. Hell they could start with arresting the SEC for never investigating the guy, in that case.

Goldman Sachs's behavior is probably completely legal (that doesn't mean it's morally right, just legal). Also, it's extremely unlikely that programmers working in the bowels of the big investment banks (GS, MS, BoA) are in on any lawbreaking that does occur.

It seems like these guys made several stupid mistakes:- Being loyal to Madoff et al once they knew what was going on.- Being willing to lie to the FBI and/or SEC.- Taking big bonuses to keep their mouth shut.- Staying in the country after the house of cards fell apart.

The idea being that a large investment firm, and possibly others and their clients, are all using certain code to help them decide when to execute trades. An unscrupulous third party could use knowledge of that code to place investments that trigger trades by GS, which is large enough to affect the market. In effect manipulating the market by manipulating GS.

The market gets manipulated by the sheer size of GS, and the main loser would be GS, as well, since they're already using their software to maximize their own benefit.

Which brings to mind the issue that the sheer size of GS is the real issue, not the software that they use. Someone here once said, "too big to fail? More like too big to be allowed to exist!" Everyone that received bail-out money should be broken into smaller entities on a staggered basis when the economy recovers.

it is clear that their high-speed trading is effectively a zero sum game and by enriching themselves, they are not providing greater prosperity for others.

So long as I can still make money day trading on the stock market, I don't care. And I CAN still make money.

The high speed trading provides liquidity. I need someone to buy stock from me or sell stock to me. Without these traders, I'd place a bid/ask and wait. And wait. And wait. And maybe I'd get my price. Maybe I wouldn't, in which case I'd waste both my time and the missed opportunity. When you're day trading you usually need to get in and out FAST. Doing otherwise is called "investing", not day trading.

What concerns me is the ability of a multi-trillion dollar company to have access to more information than you (ie, level 3), and since they are brokers possibly the ability to track and uniquely identify shares. So they can, in theory, know who bought what at what price and therefore who is holding what thanks to databases, and thus use their vast resources to pressure people into closing/covering their positions to their advantage. THAT is unfair and should be illegal. It's akin to knowing the order of cards in a deck. It's an unfair advantage. However without breaking into their proprietary computer records, we'll never know if something like this is actually happening. It probably is.

The good thing is, as a little fish, it's not my 1000 share or so transactions that is going to make them want to single me out to screw me over. I pity the banks and mutual funds, however.

Unless the programmers were committing fraud by asking people for investment money with no intention to return it, how are they breaking the law?

I understand Madoff would provide quarterly statements showing a more-or-less constant rate of return, listing fictitious trades that would justify the rate of return, using knowledge of actual prices in the past quarter to get the numbers to come out just right (which is easy enough in hindsight). I'm all for presuming these guys innocent, but I think your outrage is misplaced. It's hard to imagine a spec for this software that wouldn't be at least a bit suspicious, so you can hardly blame them for looking into the programmers.

Which brings to mind the issue that the sheer size of GS is the real issue, not the software that they use. Someone here once said, "too big to fail? More like too big to be allowed to exist!" Everyone that received bail-out money should be broken into smaller entities on a staggered basis when the economy recovers.

There's the old joke (updated for today's numbers) - "if you owe the bank $100,000 that's your problem. If you owe them a billion dollars, that's their probelm."

Buffet did lobby for bailouts of a different nature, in which the government would get voting stock in the companies they bailed out, there were clear stipulations on where money was spent (so it didn't go into pockets like his), and there was massive accountability.

When Buffet bailed out GE, he laid out such a framework and encouraged the government to follow suit. And while Buffet has a high personal worth because of stock he owns, he has always been know to live frugally, and is now giving away the massive bulk of his wealth.

However Buffet is a known conservative, so a liberally-slanted website is all but obligated to go on a character assassination for no good reason. (I'm neither Republican nor Democrat. I just hate lying. If anything, I support true liberalism, in which there is less government restriction period, and personal liberties are protected as much as possible).

Well, the problem is they were sending out statements. Those statements were theoretically based on input from the markets, after the amounts were made bigger by the black box which was Madoff's investment "strategy". Once the black box was determined to be a fraud, the programmers were done, because they implemented the black box. At that point,no amount of deleting was going to get them out of being implicated.

. If you worked at a company that only made a 1% net profit, but invested in its people, its infrastructure and its goals, would that be worth it?

It may be worth it to work there, but solely as a return on investment, no it is not "worth it". There are numerous other items that could be invested in (bonds, real estate, commodities) that offer far better that a 1% return with far lower risk.

So no, it isn't worth it if you believe the sole function of a company is to generate profit. Thankfully there are a few people who believe creating great products is more important than great profits.

What you're talking about is margin - the difference between the cost price of something and the sale price. The figure of "30%" is a generally accepted minimum margin for a business.

It depends - enormously - on turnover.

If you turn over your inventory (on the average) in a week or less, like a grocery store, a 1% profit comes out to over 50% in a year (and that's not counting compounding). This is why grocery stores are VERY sensitive to shoplifting and spoilage costs.

If you turn over your inventory in a couple quarters or a year, you'd better be making margins in the 30-50% range if you want to stay viable.

And yes, Buffett did benefit from the bailouts... Not to mention Buffett recently tried to back Goldman's recent proposal to buy tax credits from Fannie Mae [ritholtz.com]. He's not the boogeyman, but he's not the nice, friendly man with a sincere belief in capitalism that he is sometimes made out to be.

1% profit is not the same as 1% ROI. The first 1% is out of gross receipts, the second is out of initial investment which are two completely different numbers. 1% profit can easily be 20-30% ROI depending on the structure of the business (grocery stores come to mind).

A 60k bonus for a good 'lead' programmer working in the financial industry is very low.

Maybe they weren't good programmers. Programmers with mediocre skills (or something else that would have looked wrong on a resume) and flexible morality might have been exactly what was bought here. They'd be paid more than they could get anywhere else so less worry that they'd run off. And because Madoff was running a Ponzi scheme, he didn't need high quality programmers (or other staff on the financial side) any more. He just needed enough staff to make it look good. The sales end would be the only place he'd need quality people (since he's still selling his fund).

The conservatives have spent how much on two wars? An honestly reported Defense budget, where costs such as medical care for wounded vets aren't shuffled over to HEW, makes military spending well more than 50% of the total. You could completely close all federal programs except prisons, war on drugs and defense, privatize everything there that you could, and you still have an incredibly bloated federal government at zero % liberalism.
And it was conservatives that rushed through the biggest single spending program ever, a bank bailout with no strings attached. The 'liberals' have spent less on this, taken more time for rational debate, and demanded more accountability. (And still ended up giving away our money to parasites and freeloaders, but at least at a slightly lower rate than your beloved conservatives).
You do know, don't you, that it's conservative drug war policy that drives over 90% of our foreign aid to South and Central America? See, when we give Colombia modern troop transport helicopters for anti-drug use, we have complaints from their neighbors that those choppers could be used for other activities, such as a nice little invasion, so we give the neighbors aid to buy more military hardware too, whether they have the same drug problems or not, until there's a balance of power restored. It's conservative mandated spending, and really spending driven by the DEA, but it gets blamed on the 'liberals', since it goes on the books as foreign aid, and 'everyone knows' that's them bleeding heart do-gooder types.
Education? No Child Left Behind is a conservative program. How much did it add to government controls and the tax and spend mentality? Has it worked?
Why are there now 17 federal agencies where there are firearms carrying agents (and yes that excludes the military)? Are liberals the ones giving out more guns to BATF, DEA, Dept. of the Interior, and so on, and how does that fit with getting government out of our lives?